Limited Liability Partnerships:



Chapter 8

Limited Liability Partnerships:

Managers Without Liability

Introduction

This chapter introduces limited liability partnerships (LLPs). LLPs offer the management rights of general partnerships with the liability protections of the limited partnership. Although LLPs are relatively new, they have been adopted in all states and are fast becoming a favored organizational alternative for many businesses.

Lecture Notes

Limited Liability Partnership Defined

An LLP is general or limited partnership that registers as an LLP with the secretary of state, thereby protecting its partners from vicarious liability for the negligence or malfeasance of their partners.

Advantages

relative simplicity of organization

limited vicarious liability

Disadvantages

unlimited personal liability for partner’s own negligence or malfeasance

automatic dissolution upon withdrawal or incapacity of one or more partners, absent agreement to the contrary

Management

1. All partners have management rights.

2. All partners are personally liable for own negligence. But not for negligence or malfeasance of other partners that they did not supervise or participate in.

Liability

Business Liability

All partners are liable to the amount of their investment for the

contractual obligations of the partnerships

plus

Personal Liability

Negligence or malfeasance of other partners that they participated in or supervised

Partial-shield states:

LLP partners have no personal liability for the negligence or malfeasance of their partners unless they participated in, supervised, or had knowledge of their partners’ actions.

Full-shield states

Offer LLP partners unlimited personal liability protection for the negligence or malfeasance of their partners as well as all other business or contractual obligations.

Note: all partners in an LLP remain personal liable for their own negligence or malfeasance.

Formation

Special Considerations for LLPs

Name

LLPs must designate “LLP” or “llp” in its name in order to notify the public of limited liability of partners.

Registration of LLP

File application for registration of limited liability partnership.

1. Form either general or limited partnership.

2. File application for registration of LLP.

Taxation

partnership income = personal income of partners

□ Termination

Dissolution

An LLP dissolves when a partner dissociates or involuntarily withdraws (death, incapacity, bankruptcy).

Rationale: A change in management creates a dissolution of the partnership.

Continuation of Partnership

1. Partnership Agreement

The partnership agreement may provide for continuation of the partnership.

2. Buyout Provision

In states that have adopted the Revised Uniform Partnership Act (RUPA), the partnership may have a 90-day period during which the withdrawing partner may waive the right to have the partnership wound up, electing instead to have his or her interest in the partnership bought out by the remaining partners.

Winding Up

Complete partnership business

1. Finish existing contracts.

2. Collect debts owed.

3. Pay obligations due to creditors

File notice with secretary of state concerning termination of partnership.

Answers to Study Questions in Review

1. What is the advantage of LLPs versus general or limited partnerships?

LLPs offer all partners the right to participate in the management and operation of a partnership business without subjecting themselves to unlimited personal liability.

2. Who are the managers of an LLP?

All partners have the right to manage the partnership’s business.

3. Are partners of LLPs liable for the contractual debts and obligations of the partnership?

Yes. In the majority of states, all partners of an LLP remain personally liable for the contractual debts and obligations of the partnership, as well as the obligations arising from their own wrongdoing. LLPs do, however, protect partners from personal liability for the obligations arising because of the negligence or malfeasance of their partners that they did not supervise, participate in, or have knowledge of.

4. What steps must partners of a general partnership take to receive the statutory liability protections afforded an LLP?

After forming a general partnership, partners seeking the protections of an LLP must (1) apply for LLP registration and (2) include the designation “limited liability partnership,” or an abbreviated form, in their name.

5. What is the purpose of including the LLP designation as part of the partnership’s name?

The designation theoretically notifies parties dealing with the partnership of the limited personal liability of the partners.

6. How are LLPs taxed?

The LLP is not taxed. As with limited and general partnerships, the individual partners report their respective share of the partnership’s income as their personal income.

7. In what way is an LLP like a corporation?

Like a corporation, an LLP operates for profit, has continuity of life (although some states statutorily limit this), and offers its partners limited liability..

8. Explain the liability protections of an LLP.

Partners of an LLP generally do not have personal liability for the negligence or malfeasance of their partners, unless they supervised, participated in, or had knowledge of it.

9. What are the disadvantages of the LLP?

LLPs are not uniformly adopted in all states, their taxation status is uncertain, partners remain personally liable for the contractual obligations of the partnership and their own negligence or malfeasance, and LLPs automatically dissolve upon the withdrawal or incapacity of one or more of their partners.

10. What measures does RUPA provide to allow an interim continuation of an LLP after the death or withdrawal of a partner?

The deferred dissolution provisions of RUPA will allow a 90-day grace period during which the partnership business may continue and the withdrawing partner may choose to waive his or her right to have the partnership business wound up.

Answers to Case Studies in Review

1. Renee, Donald, and Van are attorneys in a general practice firm. Last year, they registered as an LLP. Unknown to Renee, Donald has been embezzling funds from several of his clients’ trust fund accounts. Van, who oversees the trust fund accounts, has noticed several withdrawals that have not been accounted for. He intended to look into the deductions, but he has been involved in a major trial for the past six months and hasn’t had a chance. Four months ago, he mentioned the problems to Renee and Donald and said that he would look into it. Who would be liable for the mismanagement of the client’s accounts?

Donald and Van would be responsible for the deductions. LLPs protect partners from the negligence and malfeasance of their partners if they did not participate, supervise, or have knowledge of it. Donald participated in the malfeasance, and Van was responsible for supervising it. The question remains, however, whether Van’s comment about the problems put Renee on notice of potential malfeasance and therefore placed on her the obligation to at least look into the problem. However, Van’s assurance that he would “look in to it” may relieve her of responsibility. Of course, the time lapse, four months, suggests that Van was not looking into it. She may, therefore, be considered to have “knowledge” of potential malfeasance and could be held liable for the client’s losses.

2. Michelle and Kevin own a general accounting firm in your state. They have worked as partners for 10 years and have never felt the need to file for corporate status. However, last year, Michelle’s daughter, Sandy, who was working as a paralegal for a local law firm, told them about LLPs. Sandy told Michelle and Kevin that they could become an LLP, with its attendant liability protections, by simply adding “LLP” at the end of their partnership name. Is this sufficient to allow Michelle and Kevin the liability protections of an LLP?

No. They must also register their status with the secretary of state.

Project Applications

1. Research your state’s statutes. Does your state provide for LLPs? Cite the applicable statutory provision.

2. Based upon the results of your preceding research, what liability protections are afforded partners of a LLP in your state?

3. Contact your state’s secretary of state to determine if LLPs are statutorily allowed. If so, prepare the registration forms for the following fictitious partnership:

Monica and Pam have been practicing general dentistry together for five years. They work mainly with children and are well-known for their excellent work. Their state does not allow medical professionals to form corporations; therefore, they have worked together in a general partnership. However, last week, they received a letter from their attorney notifying them that the state has recently adopted a new form of partnership, known as the LLP. Monica and Pam like the liability protections of the LLP. They ask the firm to draft the registration documents.

Their file contains the following relevant information:

Monica Tooth Pam Braces

100 South West 340 Bend Drive #6

Anytown, (your state) 55555 Anytown, (your state) 55555

Business Address: Tooth & Braces Dentistry

400 Brooks Street

Anytown, (your state) 55555

County: Anytown County

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